Episode 34: How to talk to the tax office

Tax season could easily be a small business owner’s most dreaded time of year. So how do you set yourself up ahead of time to avoid tax paralysis? And how do you overcome it when it does set in?

This week on Xero In Rob Stone and JV Douglas are joined once more by Peter Strong, CEO at the Council for Small Business Australia (COSBOA) and a strong advocate for small businesses when it comes to getting through the tax season.

“A small business is a person,” Peter tells Rob and JV. “And most of the time if there’s a problem with a small business it’s because of confusion or they’re going through some life crisis or some business crisis, but it’s certainly not dishonesty that causes the problem.”

Tune in to find out what you need to know when it comes to working with the tax office, and how to prepare your business ahead of time.

[0:00:52] JVD: I get totally terrified every time I have to do my tax not because I’m doing anything wrong just because I think I’m going to make a mistake. And it go to the extent one year that I was doing the washing in the backyard and I had a basket full of washing and a couple of police turned up. Now they were there to ask about a car that had been abandoned across the road but I didn’t know that and I just handed my tax in a week before. And I saw the police come around the corner and I dropped the washing and put my hands up in the air and went “I handed my tax in last week”. And they thought it was the funniest thing they’d ever seen. So this whole idea of tax paralysis is something that I understand deeply because I experience it every 12 months.

[0:01:40] RS: And we’re so lucky to have Peter Strong who’s the CEO of COSBOA, which is the Council of Small Business Australia, to give us the insight about how to actually talk to the tax office.

[0:01:48] JVD: Absolutely because if that’s what it’s like for my personal tax I can only imagine what it’s like when you’re doing the tax for your entire company.

[0:01:57] RS: Exactly, let’s go to Peter.

[0:02:00] JVD: So welcome back to Xero In, today we’re joined by one of my favourite people in the Australian business community, it’s Peter Strong. He’s the CEO of the Council of Small Business Australia. He’s on all kinds of boards that look after the wellbeing of small businesses including the Australian Tax Commissioner’s Small Business Advisory Group. Peter, welcome to Xero In.

[0:02:24] PS: Thank you.

[0:04:32] JVD: Do you think a lot of the fear that business and small business has around tax is a legacy of the way they’ve been traditionally treated by the ATO? And not just the ATO, other sort of larger organisations be they governmental or other sort of private sector groups. Is it a legacy of what happened before, should they perhaps change their attitude?

PS: Now what they discovered is in the modern world that’s not the way to treat small business because we’re people. Treat big business like that, if someone in big business is dodging tax go get them, and we all think that. But if it’s someone down the road who’s dodging tax are they really dodging tax or are they just confused by the system? And most of the time with small business if there’s a problem it’s because of confusion or in some cases they’re going through some life crisis or some business crisis but it’s certainly not dishonesty that causes the problem.

In the end we’re getting there. If anybody has rung the tax office I would say at least nine times out of ten when you make a phone call, if not more, you’re going to get someone at the other end who’s really helpful, that goes out of their way to give advice to put you onto someone that can help you. They’ve really become quite helpful and I can give plenty of stories about how good they are. Now there’s got to still be stories out there about, you know, the problems they cause but there’s a lot less than people used to think. As a matter of fact I think I saw the figures last year, there were 1,500 complaints against the tax office that weren’t resolved so out of the hundreds of millions of things they do that’s not many.

[0:02:26] JVD: When we first met you had just been speaking to the newly incoming tax commissioner, and you were really advocating on behalf of small business and it led to a monumental shift in the way the tax office treated small business essentially as human beings as opposed to as very large entities. Can you tell us a little bit about that phase and some of the changes that you were able to bring about?

[0:02:56] PS: The changes came from the good attitude that we had in the senior management in particular in the tax office. When I took over the job, we sat down with the board of COSBOA and we said look how have we done over the last 20 years? And we said well in actual fact we’ve gone backwards. And we had a good talk about why and we said well it’s because the left and right wing of politics and policy makers, etcetera, have stopped treating us as people and they’ve said no they’re just businesses.

They think we’re a shop, or a computer, or a car, or a truck, and we said – well no, there’s an inherent difference, a profound difference, is a small business is a person. Maybe it’s a couple but that’s two people, so we’re people, and if you treat us like people you’re going to get a much better result but if you treat us like machines or things then we’re not going to deliver what you want because we can’t.

We talk about when it comes to small business it is so much about process and communications. In big business they’ve got experts who dwell on that and live with that and can do that and they’re paid to do it but in small business if the communications are convoluted we won’t understand them and they’ll fail and if the processes are difficult we’ll make mistakes and they’ll fail so the processes have got to be as easy as possible and the communications have got to be easily understood.

[0:08:06] RS: And, Peter, standard business reporting or SBR – it’s a hot topic right now. What is it and how is it going to help small business in relation to the ATO?

[0:08:17] PS: I’ve been involved with this for about six years now. Standard business reporting is something that we won’t even notice in small business, all it means is the software developers can develop a software that talks instantly to the tax office. So instead of me having to re-key something into the system or re-key a business activity statement and whatever it is I understand that business reporting – it should happen automatically, just press a button saying yes, inform the – the BAS or inform the tax office or whatever it is.

And the end point which we’ll get in a few years is when that information goes to the tax office then with our permission that will inform anybody else that needs to annoy us. So it may be someone down at Centrelink who wants to know if someone was working for us, it may be the Australian Bureau of Statistics who wants to know what our turnover was, those sorts of people that come to us separately will now be dealt with in one hit.

[0:09:26] JVD: So that’s going to cut down on a lot of the sort of unnecessary mistakes that small businesses make.

[0:09:35] PS: Yeah that’s a really good point about cutting down on mistakes. If your system is doing it for you, if your software is doing it for you, well the mistakes are going to be very minimal indeed.

[0:26:53] RS: So what is the single biggest mistake you see small business owners making at tax time?

[0:10:11] PS: Well the biggest mistake is not doing the tax. So get it done on time, they give us plenty of time for small business compared to the individual tax lodger. The other ones get expert advice, if you’ve got a very simple business that you feel you can do yourself, fine, in a lot of cases you’re better off going to see a bookkeeper, an accountant or tax agent, whatever it is.

I would ask some people from your same industry, ask them who you use as an accountant or who does their tax because an accountant in the transport sector is going to understand the issues around tax there a lot better than someone who’s never done tax for the transport sector and the same with retail and the same with others. So certainly getting someone that knows what they’re doing helping you is a really good thing to do.

[0:11:25] JVD: I’m sure there are a number of people listening that haven’t actually done their tax and they have entered into that horrific phase of tax paralysis. What’s the best thing that they can do right now to get back on track and also to shift into a new way of operating so that they don’t fall into these bad habits for next tax season?

[0:11:49] PS: Well the first thing is either go and see an accountant and sometimes people haven’t lodged their tax because they’re going through a difficult time...

[0:11:57] PS: And they haven’t got the money to go to an accountant. In that case make a phone call to the tax office. They are normally very good, especially when you’re up front and you’re honest and you say look this is what happened, I’m late, what can I do. And normally they’ll say okay when can you get it to us and of course then you’ve got to get it to them. But that’s the first thing I’d do, is go and get rid of that stress. And then go and get it done and as I say if it’s a matter of money or whatever I would go and get the tax return, download it off online and go through it as best you can.

[0:26:53] RS: Which are the ones you can do yourself and what should you seek help with?

[0:12:56] PS: It’s when you get into too much depreciation or specialised tax areas where you might be claiming, I don’t know, diesel tax rebates or something. That’s when, if you’re uncomfortable you should go and get assistance.

I’d go and see an accountant and just explain it to them and say how much. I’ve got to say if you’ve got all the information in front of you it’s not going to be that expensive, the expense comes when they’ve got to go hunting through your accounts, through your bank balances and all those sorts of things to find out what’s going on. So if you can go to the bank balances for that period, and most of us can online these days, it might take a few hours and work out what your income was, what your turnover was, what your expenses were, go to the accountant. That person may say I need to know what your rent is separate from the cost of goods or whatever, if you’re not sure what that means ask, they don’t mind being asked, believe me, and then go and get that information and bring it back again.

[0:14:16] JVD: The other thing too is it’s always more terrifying before you do it. It lifts that huge weight off your shoulders and you can actually get on and do other things as well.

[0:14:36] PS: Can I tell you a really good story about the tax office?

[0:14:54] JVD: Yeah go on.

[0:14:56] PS: This person had rung up Beyond Blue, poor woman, and there was a tragedy in the family. Her father had passed away perhaps tragically and so they just didn’t know what to do with the business and you only ring Beyond Blue when you’re in a certain crisis. And so having identified the fact that it was about a business that was having trouble with that woman’s permission Beyond Blue contacted the tax office and then with the family’s permission the tax office sent three of their staff out to this particular business for two days and they sat down and went through all the shoe boxes and the computers and did all the old tax returns going back a few years, did all the business activity statements and closed that business down on behalf of the family.

And that is just a wonderful story of stress management. Everybody won. The tax office won, the taxpayer won, the family won, and they could all move on with their lives.

[0:16:56] RS: So do you think the ATO is going to simplify the tax regime in Australia?

[0:17:02] PS: That’s their aim, they’ve started a thing called single touch payroll which we’re all looking at at the moment where the theory being that you do a pay run, pay your staff, say you’ve got five staff, you do five payments, and you do five pay advices, you either print them or send them by e-mail. What you’ll have now is the option to click another button and that will send the information on the PAYG off to the tax office. And if you want, this is going to be the voluntary bit, they’re not going to make people do this but if you want they will also give you the option of paying the PAYG straight away. So it’s in one hit rather than waiting for the business activity statement to be done.

Now when the software gets good enough then of course the same thing will happen with the GST information on sales, that can be sent off straight away. So in the end we shouldn’t have to do a business activity statement. Now that won’t happen overnight, that will happen in a couple of years at the earliest but that will happen.

[0:18:14] JVD: I can think of so many small businesses out there that are just cheering at the very idea of not having to do a BAS.

[0:18:42] RS: What’s the consequences of that for all the bookkeepers out there in Australia and the accountants?

[0:18:48] PS: Well most of them are not unhappy at all with that because the value that accountants add is not in inputting and extracting data, it’s the way they manage it and the way they use that to help people manage their business. And it’s the same with the bookkeepers, they want to streamline things and make it easier for people and it makes it easier for the bookkeepers too which means, and some people are going to be cynical about this, it means they will become cheaper because they’ll do their job quicker, they can pick up more clients.

[0:19:26] RS: It’s an interesting one about picking up more clients because a lot of the time when you pick up a new client it’s from another bookkeeper, or an accountant, which usually indicates that the growth rate of small business, and businesses going out, it’s a relatively stable pool or growing probably lower than at least, you know, GDP. So when you say that they’ll be able to pick up more clients where are those new clients coming from?

[0:19:49] PS: Well the start-up businesses but also those that don’t have that don’t.

[0:19:57] PS: Some people I think are worried that with standard business reporting, single touch payroll, all these sorts of things, that you won’t need accountants or bookkeepers. Yet I’ve been around long enough to remember when calculators came in, I’m an old man, and I remember when I was working in an office and I had to pick and buy a calculator with print out and the sales people, or the sales men in those days, actually came to my office, and they were like $80 each or something, to convince me to buy theirs. Now some people would say calculators would put accountants or bookkeepers out of work, well they obviously didn’t. Excel, when Excel came in that would be making things so much easier, would put people out of work. It didn’t, it made it easier to be a good accountant or a bookkeeper than before, it made things quicker and smarter.

[0:21:50] JVD: A lot of the changes we’ve been speaking about are really backend changes that the ATO is making to its systems to make life easier, what about tax reform as such, what are the sorts of changes that you’d like to see made or effectively your constituents need to see made in order to operate more effectively?

[0:22:13] PS: First thing I’d say is that it affects different sectors differently obviously and some people don’t have a problem with tax if they’ve got a fairly simple business. And the other ones where it’s more complicated, yes, there needs to be a change to make it easier. For instance you’re a micro brewer and everybody loves a micro brewer. Well they have to lodge every week or every fortnight they’ve got to ring up and tell the tax office what they’ve made and how they’ve made it and who they’ve sold it to. It’s quite onerous, quite onerous.

The other one we’re talking about in the experimentation is the tax office and a business coming to an agreement saying okay look your business is fairly predictable so how about we agree that the tax you paid last year you pay that for the next three years every year with a CPI increase of 3% and that’s it, you don’t have to put a return in just send the money.

[0:25:14] RS: Would you like the Australian tax regime to be more like New Zealand’s?

[0:25:19] PS: Look yeah there’s some benefits to be had with New Zealand, without a doubt, but again I liked our tax system. Talking to New Zealand is always a good thing. There are some differences, we have states, they don’t.

[0:24:14] PS: Now there’s some parts of the tax – what’s happening in Europe that I’d like to see us follow and e-invoicing is one area where it looks like we’re going to leapfrog them but at the moment we’re behind them on e-invoicing. And think there’s places I don’t want to be like. I think in Scandinavia they have a system where if you open anything like a restaurant, a coffee shop or anything, I think even retail, you’ve got to – you’ve got to pay for a special black box delivered from the tax office that you attach to your cash register that the tax office person can come and look at any time they want, they can open it up and they can look at it and if they think that say between one and two o’clock on a certain day there was no sales they will deem that cash sales were made that day and you have to pay the tax on that.

[0:25:47] RS: Peter thank you so much for talking with us today and sharing some insight on how to talk with the tax office.

[0:25:53] JVD: And how to get through that tax paralysis. Thanks so much for joining us.

[0:25:56] PS: Thanks for having me.

[0:25:59] RS: Well what a fascinating interview with Peter. You know, key takeaways for me was just how he managed to humanise small business to the ATO which, you know, is such a huge mind shift. And then also around just to free up the time for small business owners.

[0:26:18] JVD: Yeah it’s interesting seeing how much work needs to be done at the back end really to free up the front end, to free us up from what we otherwise would have had to be doing which is filling in books. Also forward looking in terms of how we can all better prepare to not enter into tax paralysis and have panics at the last minute.

[0:26:43] JVD: Thanks everybody for tuning in and we look forward to chatting with you next week.